After pressing Europe to focus on stimulus, US now feeling effect of own cutbacks

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Police were patrolling the waters around the G8 summit venue in Enniskillen, Northern Ireland, on Sunday.

By Jackie Calmes
New York Times
June 17, 2013

NEW YORK — As President Obama begins an annual meeting with the leaders of some of the world’s richest nations on Monday in Northern Ireland, the economic-policy gulf that has divided them since the global crash in 2008 has narrowed significantly — just not exactly in ways the White House would have liked.

The Europeans lately have slightly eased their austerity policies, after four years of deep spending cuts and rising taxes that many economists blame for keeping the Continent in recession long after America’s ended.

In contrast, the Obama administration, after years of pressing Europe to adopt American-style stimulus measures, is now presiding — if reluctantly — over European-style austerity that is measurably slowing its recovery.

Much of that austerity is in the form of across-the-board spending cuts known as sequestration that were forced by Republicans in Congress. But Obama supported an end this year to both a temporary payroll-tax cut, which the Congressional Budget Office and private analysts credited with spurring consumer spending and creating jobs, and the Bush-era income tax cuts for the wealthy. What stimulus remains in the US economy can be credited to the expansionary monetary policies of the independent Federal Reserve System.

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That new reality in the United States reduces the president’s already limited leverage in his fiscal debate with Europeans, analysts on both sides of the Atlantic say, even as Europe’s woes continue to act as a drag on its trading partners, including the United States.

“President Obama will continue trying to lead by persuasion rather than by example,” said Eswar Shanker Prasad, an economics professor at Cornell University and a former International Monetary Fund official. “The US is likely to push other countries towards adopting measures to support growth, including a slowdown in the drive for fiscal austerity, but against the backdrop of its own premature fiscal tightening.”

With the United States “just beginning to solidify its recovery, the last thing it needs right now is a major shock emanating from Europe,” Prasad added. “But the reality is that the United States can only jawbone. It cannot really influence policies in any substantive way.”

American and European officials said that arguments over austerity versus stimulus are likely to be muted at the two-day summit of the Group of 8 industrialized countries being held in Northern Ireland. Participants include the leaders of Canada, Britain, France, Germany, Italy, Japan, and Russia — countries that account for about half of the world’s economic activity.

The reduced emphasis on stimulus versus austerity occurs even as unemployment remains at double digits in much of Europe, stoking unrest. In part it reflects the fact that this spring, in advance of the summit, Treasury Secretary Jacob J. Lew and his counterparts among European financial ministers hashed out their differences so the heads of state could focus elsewhere. Also, the Group of 8 agenda is set by the gathering’s host — for this meeting, the conservative and pro-austerity prime minister of Britain, David Cameron.

Yet even Cameron’s agenda, on international taxation, tax transparency, and trade, is likely to be overshadowed by the allies’ intensifying foreign-policy debate over whether and how to intervene in Syria’s worsening civil war.

Administration officials say Obama is likely to make his most fulsome economic arguments against Europe’s continued emphasis on budget cutting — and for the relatively successful US model — after the Group of 8 meeting, when he flies to Germany. On Wednesday he is to be in Berlin.

The opening session Monday is to discuss the global economy. Previewing the summit Friday, Caroline Atkinson, Obama’s chief adviser for the event, said “the context for that discussion has changed a lot over the past year.”

“In Europe, for example, financial tensions have eased considerably, but large parts of Europe remain in recession and unemployment in some countries is at record highs,” Atkinson said. “In the US, our recovery is underway. We’ve successfully avoided the fiscal cliff and our budget deficit is declining rapidly. But of course we have more work to do to create jobs.”

She added: “We expect that G-8 leaders will express a consensus that growth and jobs are a top priority.”

‘We expect that G-8 leaders will express a consensus that growth and jobs are a top priority.’

The problem is that the Americans and the European leaders continue to define what produces growth in different ways — differences that have a parallel in the domestic debate between Obama and Republican lawmakers. German Chancellor Angela Merkel and Cameron say reducing deficits and debt to reassure lenders will bring growth. The Americans say the US recovery shows that, in a crisis, fiscal and monetary stimulus should come first.

“If Europe had done like we did, they may not be in the situation they’re in,” said Tony Fratto, a Treasury official during the George W. Bush administration. “Europe went straight to austerity before growth. They’re actually still in a sustained recession — and in some countries it’s a sustained depression.”

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